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Julius Baer AT1 – good value despite the coupon?

6 September 2017 by Eoin Walsh

The AT1 new issue market reopened with a bang yesterday, with the launch of a deal from Julius Baer.

Julius Baer is a well-respected Swiss banking group, primarily offering private banking and advisory services, and the largest of the traditional Swiss private banks. It has reported stable growing revenues over the past few years, has an unsurprisingly low NPL ratio of 0.1%, a fully loaded CET1 ratio of 11.9%, and carries an A2 rating from Moody’s. Therefore, from a fundamental viewpoint, the deal ticked most of the boxes from an investor’s perspective.

On a transactional basis the deal size was relatively small at $300m and came with a 7-year call option. Critically, with an investment grade rating of Baa3 it quickly attracted a lot of attention, although I would imagine that even the lead managers were surprised by the level of its success.  Initial price talk was 5.5%, which we felt was fair value, but after gathering orders of approx. $10bn and in doing so apparently breaking the record for oversubscriptions, the deal tightened to 4.75%; with the book losing very few orders according to lead managers. For us, despite liking the credit, the deal was just too tight to be involved; particularly as the fx-basis renders a $ yield of 4.75% to approximate to 3.55% in STG. In addition, and just as important, is the reversionary rate (i.e. the rate the coupon will reset to if the issue is not called) which is just $ 2.844% – so it remains questionable whether this transaction can be “economically” called in 2024!

So, with such a tight coupon, indeed the lowest coupon to date for an AT1, why did it gather so much demand? Firstly, this is a Swiss bank that is neither UBS nor Credit Suisse, and therefore doesn’t have an investment banking arm attached and has rarity value. Julius Baer is also a really well-known and respected name, operating in all of the major financial centres around the globe, and therefore it was always likely to attract a lot of real money orders, as well as a lot of “fast money”. Crucially, the deal is also one of very few AT1s that comes with an investment grade rating, which adds to demand. It is also worth highlighting that “AT1” is just a label, it ranks at the bottom of the capital structure, but all debt is ‘bail in-able’ in a bankruptcy. The A2 Julius Baer rating does help to calm any bankruptcy fears, and therefore, there will certainly be investors that simply see this as an attractively priced slice of Julius Baer debt. Remember, pre-crisis, it wasn’t unusual to see subordinated debt pricing below L+100.

The deal is trading very well this morning, with bids up at 101.75, and although there are offers around as the fast money looks to take quick profits, given the small size of the deal, most of the bonds will sit in real money hands and should be well supported. As mentioned above we didn’t take part in the new issue, we like the bank but have a tightly held AT1 group and from a relative value point of view there simply wasn’t any obvious name to switch out of.

So is there any read across for new issues in the broader credit markets? We think the answer is probably not; this was a fairly exclusive new issue in the AT1 space and certainly reading across to the high yield market doesn’t make sense. However, the AT1 market is still the obvious transmission sector for volatility, and given the rally in treasuries and current risk-off tone prevailing, investors might be forgiven for expecting to pick up this new issue at a more attractive coupon. What it does probably signal though, is that excluding a geopolitical led sell-off, the grind tighter in AT1 yields is likely to restart and continue into year-end.

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